5 Outdated Retirement Savings Rules, and What to Do Instead

You've probably heard quite a few retirement "rules" over the years, like you should try to save $1 million and pay off your debt before you retire. While that advice may have worked for your parents or grandparents, we're living in a different time.

Life expectancies have risen and so have expenses. Social Security doesn't go as far as it used to. And all of that makes it really tough to retire comfortably if you're following the old retirement planning playbook. Here are a few examples of old retirement rules that could actually hurt you more than help you and what you should do instead.

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Perhaps the biggest myth of all: $1 million used to be the gold standard for retirement savings. But it's not applicable to most people today. Inflation has eroded the value of the dollar, so $1 million won't buy you as much now as it would have a few decades ago. Plus, people are living longer, and that means they'll need to cover more years of living expenses.

If a couple spends $50,000 per year (assuming a 3% annual inflation rate), retires at 62, and lives until 90, they'll need about $1.4 million. And if they spend more than that or live longer, it's not unreasonable to think they could need $2 million or more. Social Security will cover some of that, but they may need more than $1 million in personal savings to make ends meet.

ALSO READ: How to Retire With $2 Million on an $80,000 Salary

There is no magic retirement savings number. Every retiree's situation is different; therefore, the amounts they need to save are different. Brainstorm how you plan to spend your retirement and try to estimate how much that will cost you. Think about how long you expect to live, too, as this will affect how many years of living expenses you have to cover.

You can use a retirement calculator to help you estimate how much you must save overall and per month to hit that goal. It may ask you about estimated inflation rates and investment rates of return. Choose 3% per year for inflation and 5% to 6% for your investments. These are pretty conservative estimates that will help reduce your risk of running out of savings in retirement.

Retirees often have lower expenses than they did while they were working. The old rule of thumb was that you'd need about 70% of your preretirement income to cover your retirement expenses. Some said 80% of your preretirement income instead.

That could be true for some retirees, but it's a dangerous assumption to make. If you plan to travel often in retirement, you could easily spend more than you're used to spending in a year. The same is true for those with health issues that require medication and frequent doctor visits.

As discussed in the previous slide, you should build your retirement plan around your personal goals rather than relying upon any generic rule. Think about how you believe your spending will shift between now and your retirement, and let that guide your estimates for your living expenses.

You presumably won't be raising children in retirement, nor will you have to save for retirement, so those expenses will disappear. But you might be traveling more or spending more time on hobbies. Once you're clear on how your lifestyle will change, you can come up with a good estimate for how much, if any, your annual living expenses will decrease.

ALSO READ: 3 Ways to Grow $100,000 Into $1 Million for Retirement Savings

When it comes to actually using your retirement savings, the old advice used to be to withdraw 4% of your retirement savings in your first year of retirement. Then, you could safely increase this amount slightly every year to counter the rate of inflation.

The problem with this rule is that it doesn't account for changing market conditions. It tells you to increase your withdrawals slightly every year, which may not be wise in a recession. It also can't account for shifting spending patterns in retirement. For example, a couple who plans to travel early on in their retirement and remain closer to home as they age will probably see their spending decline over time.

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There have been several alternatives proposed to the 4% rule over the years. One of the simplest is the 3% rule. It's essentially a more conservative version, which says to withdraw 3% of your savings in your first year of retirement and then increase every year for inflation. Another rule says to base your withdrawals on the IRS' required minimum distribution (RMD) tables.

You could also avoid these cookie-cutter rules altogether and come up with a custom strategy that reflects how you plan to spend your money in retirement. If you don't feel confident enough in your own financial planning abilities to do this yourself, you could always consult a financial advisor.

Previous generations were advised to set up their asset allocation so the percentage they invested in stocks was 100 minus their age. So for example, if you were 40, you'd have 60% invested in stocks and 40% in bonds.

The idea here is to reduce your exposure to stocks over time to reduce the risk of losing your savings as you near retirement. It's the right idea, but as people live longer, this rule becomes less and less useful. It encourages people to move their money out of stocks too early, missing out on the greater earning potential stocks provide.

ALSO READ: 6 Ways to Save More for Retirement Without Sacrificing Your Lifestyle

The new rule says to invest 110 minus your age in stocks. So, per the example in the previous slide, a 40-year-old would invest 70% in stocks and only 30% in bonds.

You'd still make the same gradual shift away from stocks over time, but by doing so more slowly, you can capitalize on the higher returns from stocks. This makes the monumental task of saving over $1 million for retirement a little easier.

It's great to enter retirement debt-free if you're able to do so, but that doesn't always mean you should prioritize your debt before your retirement savings.

Some debts, like mortgages, have relatively low interest rates and predictable payments, so they're not the same threat to your budget that high-interest debt is. It could be more advantageous for you to invest while you're paying off these low-interest debts so your investments can have more time to grow.

You should always try to pay off any high-interest debt you have before you retire. This includes credit card debt and payday loans. The high interest rates mean there's virtually no limit to how much you could owe, and that can devastate your retirement budget.

Consider a personal loan or a balance transfer credit card. Personal loans give you a predictable monthly payment, but the interest rate could still be high, particularly if you have poor credit. Balance transfer cards temporarily halt the growth of your balance, but if you don't pay it all off before the introductory period is up, the remaining balance will start accruing interest again.

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Retirement planning is complicated, so it's natural to look for shortcuts to make the process easier. But if you don't make a retirement plan that's tailored to you, there's a good chance you end up running short in retirement.

It may take some time, but once you have a custom retirement plan, you'll feel more confident that you know what you need to save and how much you can afford to spend annually in retirement.

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